Monday, January 29, 2018

Bangladesh maintains rate but inflation risks on upside

The central bank of Bangladesh left its benchmark repurchase and reverse repurchase rates steady at 6.75 and 4.75 percent for the second half of the 2018 financial year along with the ceiling for domestic credit growth at 15.8 percent in order to accommodate the targeted economic growth of 7.4 percent with up to 6.0 percent inflation.
Bangladesh Bank (BB), which has maintained its rates since cutting them to the current level in January 2016, added in its monetary policy statement for January-June that the continuing negative trend in government borrowing from banks should leave room for 16.8 percent private sector credit growth, up from the previous projection of 16.3 percent in H2 FY18, which began in January.
Bangladesh is seeing a robust pickup in investment and output activities, imports and credit to the private sector that is supported by progress in addressing the country's infrastructural deficiencies and the broad-based rise in global economic output and trade.
Apart from higher imports of food grains to cover crop losses from flooding in August 2017, imports are mainly of capital machinery and production inputs which should bode well for growth.
However, this also poses a near-term challenge of containing inflationary pressure and protecting the balance of payments, according to the report that was accompanied by a press conference with BB Governor Fazle Kabir.
Domestic credit grew by 14.5 percent in the first half of FY18, in line with BB's target, although private domestic sector credit grew by 18.1 percent, substantially topping the 16.2 percent target as a decline in government bank borrowing helped ease the pressure on liquidity.
Strong domestic demand, credit growth, growing exports and remittances has kept Bangladesh's economy on track to reach the 7 plus percent growth for financial 2018 while weather-related supply shocks and rising global commodity prices boosted inflation to 6.12 percent in September.
But by December inflation eased to 5.83 percent from 5.91 percent in November as food inflation was steady at 7.13 percent and non-food inflation only rose 3.85 percent, down from 4.1 percent.
"Looking ahead, inflation risks appear to be on the upside, as demonstrated by BB's inflation expectation survey," but food inflation pressure should ease from imports and the rice harvests.
BB is projecting inflation of 5.7-6.0 percent in June 2018, assuming favorable global outcome.
Bangladesh's Gross Domestic Product was estimated to have risen 7.28 percent in financial 2017, which ended June 30, 2017, despite flood-related crop losses.
Economic activity remains strong, with exports in the July-December 2017 period up by 7.2 percent from 1.7 percent in FY17. Remittances have reversed their declining trend in FY16 and were up 12.5 percent in the same period.
Imports were up 27.6 percent in July-November, with capital machinery imports up 37.5 percent and industrial raw material imports up 18.9 percent, BB said, projecting overall economic growth in FY18 of 7.1-7.4 percent, assuming continued political stability.
"Moderation of the transient imbalance from credit-fueled high import growth to sustainable trend will be a key priority for monetary and macro-prudential policies in H2 FY18 and will be important to keep in check the inflationary risks from rising global commodity prices and any spillovers from food to non-food inflation, against the backdrop of elevated inflation expectations," BB said.
Bangladesh Bank will focus its macro-prudential measures in H2 FY18 on bringing back monetary aggregates to sustainable growth mainly by "intensive, intrusive supervision focusing on quality and sectoral composition of credit flows rather than by restricting access to credit for productive pursuits," BB said.
The central bank will focus on curbing "imprudent unproductive lending" and require banks to rationalize their advance/deposit ratios to "curb their over exuberance in lending" and encourage banks to avoid investment financing exposure to corporate borrowers and instead help in corporate bond issuance in capital markets so banks are only used as interim bridge financing windows.
The gradual depreciation of the exchange rate of the taka against the U.S. dollar is helping export competitiveness, liming the current account deficit, BB added.
The taka was trading at 83.26 to the dollar today, down 0.6 percent this year and down 5.2 percent since the start of 2017.